Knowing that time in the market is more important than timing the market is an important rule of investing to get your head around but having turned all of my holdings into cash recently, I’m finding it difficult to start buying funds again.
I’ve been investing for a number of years now, mainly with the aim of saving for a house deposit. A lot of the time I would have had an investment horizon of less than five years, but was happy enough to invest in riskier parts of the market regardless – although I don’t feel as confident now.
Over time I’d built what I thought to be a pretty decent portfolio, combining lower risk options such as Troy Trojan, Kames Ethical Cautious Managed and Invesco Perpetual Global Targeted Returns with racier options such as Rathbone Global Opportunities, Schroder Tokyo and Neptune European Opportunities.
So my portfolio was up a lot more than I would have got from a cash ISA, without me being put through too much of a volatile ride, and the time is approaching for me to (hopefully) buy a small piece of overpriced London real estate so I sold out.
Which leaves me with a bit of a problem: I have a small lump sum and some regular contributions going into cash, with no idea of where to put them. In fact, I’m feeling the same kind of nerves I had before making my first ever investment.
To me, almost every asset seems to have had a strong few years already. That great run in equities and bonds that enjoyed when I had money in markets is now the thing stopping me from re-entering them, as my emotions tell me there has to be more downside than upside.
Performance of indices over 6yrs
Source: FE Analytics
But on the other hand, I’m aware that this might not be top of the market and there could well be another string of gains around the corner.
As F&C co-head of multi-manager Rob Burdett said: “Having cash is a good thing in that it gives you optionality to take advantage of any corrections. It is also a popular perception that not much is cheap right now. However with more people thinking this and holding back there is arguably an increasing chance of a 'melt-up' as markets climb the wall of worry/indifference.”
So, should I be desperately looking for somewhere to put this piling up cash or is there an argument for staying out of the market at the moment?
Ben Willis, head of research at Whitechurch, said: “If you are holding cash, then there is a case for holding on. Volatility is returning to markets and we have seen some recent falls in both bond and equity markets, so it could pay to be patient. In addition, markets have been a bit toppy until recently and it is not unreasonable to expect the usual summer lull.”
Meera Hearnden, senior investment manager at Parmenion Investment Management, adds that there are still some pockets of value remaining in the market and that attractive opportunities can still be found, depending on an investor’s risk tolerance.
“Even though some markets such as the US and some areas of the fixed interest market such as government bonds look expensive, there are other areas that still look attractive like emerging markets, Europe, Japan and the UK. The problem with cash is that the returns are so paltry, and after inflation you're getting a negative return so it certainly is worth considering investing,” she said.
“At the risky end of the market, emerging markets look attractive given the lower oil price. Of course, there are tailwinds to consider such as interest rate rises in the US but on a long-term perspective these markets look attractive. One fund to consider is the Somerset Emerging Markets Dividend Growth fund, which is a high quality GEM fund so should offer some insulation during more rocky periods in these markets.”
“Japan is also an area to consider. Even though the market has performed well over the last couple of years, we could be at the start of a bull market for Japan. Funds to consider are Neptune Japan Opportunities and Aberdeen Japan Equity which both complement each other.”
Performance of funds vs index over 3yrs
Source: FE Analytics
I agree that Japan and emerging markets, along with Europe, are pretty attractive on a valuation basis. But I’d be worried that a portfolio based heavily on these areas wouldn’t have the diversification I’ve grown used to; on the other hand, trying to cover lots of areas of the market is likely to leave me with some expensive assets that are prone to a correction.
Laith Khalaf, senior analyst at Hargreaves Lansdown, said: “I would say stick to your home stock market, so for us that’s the UK. CF Woodford Equity Income is obviously a well-known fund run by a manager with real pedigree. Sanditon UK is another good pick which employs a different approach so together these two might make a complementary pairing.”
Hearnden maintains that value opportunities can be found even in areas of the market considered ‘expensive’ to prevent investors having too many eggs in too few baskets.
“Even though some markets are expensive, such as the US, this does not mean there are no opportunities there,” she said.
“At a stock level there are pockets of value, the key is investing with managers that have consistently added value in this market. Funds we like in this market is Pioneer US Fundamental Growth or Old Mutual North American Equity.”
Both Willis and Hearnden say that Standard Life Investments Global Absolute Return Strategies (GARS) is a good starting point for a portfolio-less investor.
“To be fair, decent absolute return funds that deliver year in and year out fit that bill,” Willis said.
“These are few and far between and I hate to say it, but GARS fits the bill. It has delivered through different market conditions and maintains its risk/return target. It’s not a building block but rather an excellent all-weather starter fund. This is why it is so successful and why it attracts so much pension monies.”
Performance of fund vs indices since launch
Source: FE Analytics
Burdett, on the other hand, says that Kames UK Equity Absolute Return, Morgan Stanley Diversified Alpha Plus and Majedie Tortoise are “proven” absolute return funds that could be considered by an investor moving from cash back into funds.
Meanwhile, Khalaf says equities can provide a good building block, so long as investors have a long enough time horizon, while there are options for those of a more cautious nature.
He said: “Equity income is a good solid starter for ten – the aforementioned Woodford Equity Income as well as Artemis Income and Threadneedle UK Equity Income are good picks. More cautious investors might choose a mixed fund with an eye on capital preservation like Newton Real Return or Troy Trojan.”
While all the funds mentioned in the article are on my radar, the fact remains that I don’t feel compelled to put money anywhere in a meaningful manner right now. I suspect if I’d have just kept my monthly contributions going into my existing funds, I might not have this psychological drama going on…
But as this doubt is happening to me, the best option seems to be cash and an absolute return fund or two, until a correction makes the market more attractive or something happens that can support another leg.
What are your thoughts on this? Are you considering a much more cautious approach or is holding to risk assets on looking like the best strategy?
